Analysts from RHB Group Research and CGS-CIMB Research have maintained their “add” or “buy” calls and target prices on Wilmar International as its 50%-owned subsidiary Adani Wilmar (AWL) prepares to list on the BSE and National Stock Exchange of India.
CGS-CIMB’s Ivy Ng and Nagulan Ravi maintained their target price of $6.15, while RHB’s Singapore research team gave a target price of $5.75.
The proposed IPO will comprise the issuance of new shares by AWL for an amount of up to INR45 billion ($819 million), and will not have any secondary listing.
The proceeds from the IPO will be used for expansion of AWL’s existing manufacturing facilities and developing new manufacturing plants, repayment and prepayment of borrowings, strategic acquisitions and investments, as well as general corporate purposes.
See also: Things may get worse before they get better for Wilmar but RHB keeps 'buy' call
RHB is of the view that this development is “positive” for Wilmar, saying that the listing can boost Wilmar’s share price by 20 cents per share. This is if it trades on par with its Indian fast-moving consumer goods (FMCG) peers of an average 40 times price to earnings (P/E).
They highlight though, that Wilmar will not be receiving any proceeds directly from this IPO as this does not involve the selling of shares by the existing shareholders. Furthermore, its stake in AWL will be diluted depending on how many shares are issued.
However, the team thinks that Wilmar will benefit from the enlarged value of AWL post-listing, as well as higher earnings potential from the expansion plans using the IPO proceeds. In Wilmar’s annual report, its 50% stake in AWL currently stands at US$226.7 million, while the IPO is expected to raise US$600 million.
Furthermore, they note that FMCG companies in India trade at high P/Es. “Indian FMCG firms trade in a 20-65 times P/E range with a simple average of 42 times. Based on AWL’s latest 2020 net profit of US$93 million and applying 40 times P/E, this could add an additional 19 cents to Wilmar’s share price based on its 50% stake and excluding the new share issuance.”
As for CGS-CIMB’s Ng and Ravi, they also take the view that this is a positive development. While broadly agreeing with the view above, they also add that AWL’s listing will allow Wilmar to unlock value for shareholders, as the group could benefit through higher earnings growth prospects from AWL as it raises funding to accelerate its growth and earnings.
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The analysts note that there is a potential upside of US$2.6 billion (or 56 cents per share, according to the higher end of their sensitivity analysis on AWL’s market valuation) to their SOP valuation for Wilmar. They currently value AWL at 1 times price to book value (P/BV).
As at 12.18 pm, shares of Wilmar traded at $4.48, with a price to book ratio of 1 times and a dividend yield of 3%, according to RHB.
